Tracing: Principles and process

21st April 2016

Tracing is a process which may be available in certain cases to enable a claimant to recover funds or assets which have been unjustly lost to a knowing recipient. Tracing is an equitable remedy, which means that it is underpinned by fundamental fairness and is awarded by the court at its discretion (as opposed to a legal remedy that is available as of right to a successful claimant). As with any equitable remedy, when considering the ability of a claimant to trace funds (or, to ‘follow’ his property into the hands of a defendant), the court will apply certain principles of equity, including:

• the equitable maxim of clean hands. That is, anyone looking to equity for a remedy must be free of wrong doing him/herself;
• equity will not suffer a wrong to be without a remedy. Where fairness requires, a remedy will be provided even if one does not exist by right at law; and
• the doctrine of ‘laches’ (delay). Delay can cause unfairness in itself and so an equitable claim may be barred if it is not brought within a timely manner.

Additional requirements and complications can also arise in tracing claims. In particular, whether the defendant is in ‘knowing receipt’ of trust property (that is, property which is beneficially owned by the claimant) and in a ‘fiduciary relationship’ with the claimant, such that it would be unconscionable for him to retain it [1]; and what happens when a claimant’s property becomes ‘mixed’ with the defendant’s own?

The recent case of FHR European Ventures v Mankarious & Others [2] is a good example of the tracing process working in practice.

Tracing – a worked example

In earlier litigation between the same parties and arising out of the same facts, the Supreme Court held that a secret commission received by a dishonest agent (here, one of the defendants) should be treated as the property of the principal (the claimant) and that the principal may be able to trace to recover its loss.

The claimant was an investor. The second defendant brokered a deal for the claimant to purchase shares in a luxury hotel in Monaco. The deal earned the second defendant commission of £10 million. The second defendant transferred commission monies to the third defendant (its wholly-owned subsidiary) and to the first defendant (a Mr Mankarious, who is described in the judgment as “the moving force” behind the second and third defendants). Commission monies were also used towards the purchase of a property bought in the names of the first defendant and his wife and to purchase life insurance policies; some funds were placed into an otherwise nil balance bank account; and other funds were mixed-in within the second defendant’s own money in another account at the same bank.

In line with the Supreme Court’s earlier decision, the claimant then pursued this tracing claim in the High Court, in respect of the dealings with the commission.

The High Court held:

• The defendants were fiduciaries to the claimant and they all knew that monies received by the first and third defendants derived from the commission. That knowledge created a conflict of interest between themselves and the claimant. The defendants’ receipt of commission monies was therefore in breach of their fiduciary duties [3].
• Tracing is a matter of “hard-nosed property rights” and so the claimant was entitled to recover sums derived from the commission.
• Where those sums could be traced (or followed) into the property and life insurance policies, the claimant’s entitlement was commensurate with the proportion of the property deposit or purchase monies; or the proportion of the premium cost, paid from the commission.
• Where a defendant in knowing receipt of trust monies holds more than one account at the same bank, monies paid into one account are not to be treated as being mixed with funds held in the defendant’s other accounts. In those circumstances tracing should be relatively straightforward.
• Where funds have been mixed with the defendant’s own monies in any one account, the tracing claim will be resolved by reference to the presumption, established in Re Hallett’s Estate [4], that the defendant has spent his own money first and has preserved the claimant’s trust funds until thereafter.

WM Comment

Lenders who have suffered a shortfall following a mortgage fraud or complex, non-standard possession proceedings can often find themselves facing a tracing claim as a means of mitigating their loss. Whilst this case does not make new law, it is a helpful reminder of the key legal and practical principles that a court will apply to assist a claimant in its recovery of unjustly lost funds.

_____________________

[1] Bank of Credit and Commerce International v Akindele [2000] EWCA Civ 502
[2] FHR European Ventre LLP & Ors v Mankarious & Ors [2016] EWHC 359 (Ch)
[3] Ibid para. 25
[4] (1880) 13 Ch D 696